Yes, GDP Is Flawed, but in Which Direction?
Concrete Evidence (July 27, 2026)
Gross domestic product—basically, the value of the goods and services a country produces—profoundly shapes how modern economists and policy analysts see the world. Short-term GDP declines can indicate a recession. Longer-term trends tell us how much better off we are than our parents. International comparisons tell us which countries have the highest living standards.
But the measure has always had its critics. Certainly, there’s more to life, and more to the health of a nation, than economic growth. And all sorts of challenges bedevil the measurement of GDP. It includes services sold in the market, but not work we do for our own households; famously, if a man marries his maid and she keeps doing everything she did before, GDP goes down. Free products like Facebook aren’t counted. We can adjust GDP for inflation, but sometimes prices rise because products genuinely improved, and it’s hard to tell the difference. Vice President J.D. Vance recently annoyed free-market economists with anti-GDP passages in his new book, including one chiding the measure for failing to capture the superior taste of Japanese strawberries.
Two new working papers reevaluate long-term economic trends—and suggest that America might be even richer, relative to our standard of living in the first half of the 1900s, than we thought.
The most recent one, from two MIT scholars, is particularly neat. It argues that a lot of what we thought was inflation in the price of goods between 1900 and 1990 actually reflected improvements in product quality. It does this by using AI to parse nearly a century’s worth of Sears catalogs containing millions of product listings.
These data provide the missing link between a long-ago economy and the modern “hedonic” methods economists use to measure quality changes. In essence, such methods involve estimating the value of various product attributes and then tracking how the products change over time. If, say, vacuums with 10 percent higher suction fetch an extra $10 on average, the price of vacuums going up by $10 shouldn’t be considered inflation if suction also improved by a tenth.
“Using existing price indexes for consumer goods, real goods consumption grew by a factor of 10.3 between 1900 and 1990,” the authors note. But “using our quality-adjusted goods index, it grew by a factor of 39.” Pre-World War II growth is especially fast, they say, relative to what we previously thought.
The authors note dresses as an example. They find that $5.98 bought “a plaid gingham dress that emphasized its good quality and durability” in 1922, a “more intricate silk and wool dress with embroidered sleeves” in 1925, and a dress that “was made entirely of silk and had an even more ornate cut and pattern” in 1928.
The other new paper comes from two Stanford economists via the National Bureau of Economic Research. It uses an even more technical, roundabout method to measure rising standards of living: how much people value their lives.
Instead of measuring the value of production and trying to adjust away problems like quality changes, in other words, we can measure how much people are willing to pay to reduce their risk of death—the “value of a statistical life” that is often used in government agencies’ cost-benefit calculations. The researchers use this measure to reveal “the value of remaining lifetime utility.” They then adjust this number by “the rate at which the marginal utility of consumption spending declines,” which is key to making this calculation without opening the can of worms that is inflation. (I told you this was the more technical one.)
At any rate, like the MIT authors, the Stanford duo find that their measure suggests far more improvement than conventional measures: “lifetime utility may have risen by more than a factor of five since 1940,” they write, “whereas conventional consumption-based calculations … imply much smaller gains, on the order of a doubling.”
The authors note some big caveats, including basic difficulties in measuring the numbers used in their equations, fluctuations in which can dramatically change the results. I doubt their idea will displace GDP anytime soon, but it’s a useful exercise.
Bottom line: No, GDP doesn’t measure everything that’s important, and yes, there are good arguments that it mismeasures some things it does include. But the sunny free-market optimists can play the game of highlighting these issues as well as the dour populists can.
From the Manhattan Institute
Stephen Eide connects New York City’s migrant crisis to “welfare magnet” effects.
Other Work of Note
Why do poor neighborhoods stay poor? In part, because residents who become rich move out.
“I find the typical inclusionary zoning ordinance reduces annual new residential construction by nearly a third (31.8%).”
The declining cost of launching stuff into space.
In recent years, many states have stopped requiring a permit to carry a gun. Since most of these changes are recent, research into them is only getting started, with some early work finding, fortunately, few ill effects. However, this study finds a roughly 7 percent increase to overall violent crime, driven by a 10 percent increase in aggravated assaults and a 12 percent increase in aggravated assaults specifically committed with a firearm.
Gun sales within the U.S. seem to rise and fall mostly due to national trends, not local ones.
Why has the U.S. failed to translate economic growth into longer life expectancies?
Should elementary-school teachers specialize more by subject?
In counties where people have more debt, suicide rates rose more after the Great Recession.
One in ten Americans say politics is the greatest threat to their safety.
Tracking long-term prisoners in Illinois after their release.
Whatever your views of the food-stamp reforms in the new tax law, these data from the Center on Budget and Policy Priorities are worth knowing: “We estimate that SNAP participation nationwide fell by more than 4.5 million people (11 percent) between the law’s July 2025 enactment and April 2026.”
A proposal to make Social Security into a defined-contribution system, but then make other taxes more progressive.
Who’s really affected by changes to Medicaid spending?
Should the Defense Department fund more research?
A deep dive on wet basements in Pittsburgh.
In patent applications, men are more likely than women to keep trying after an early-stage rejection.
Does social media make us more conformist and achievement-oriented?
Academic papers, or at least biomedical ones, don’t seem to change their conclusions much as they progress from the preprint stage to publication.
It’s not correct to claim that “Free products like Facebook aren’t counted”.
It’s true, of course, that consumer surplus is not measured and counted.
But Facebook use is indeed *counted* in GDP by the advertising revenue Facebook earns from providing the “free” product.
Literally no different than the over-the-air television people have watched over the decades.
And even though it doesn’t capture the consumer surplus, the growth in Facebook’s revenue is a very decent proxy indeed for the growth in consumer surplus.
And GDP measures "services" that actually inhibit economic growth, not increase it. The glaring example of this is that Washington, DC has the highest GDP per capita; higher than all states and double that of No. 2 California.
What product does Washington, DC produce besides pizza for the Pentagon? If anything, Washington, DC's "products" substantially reduce the GDP potential for the rest of the country.